Credit is an important part of the home buying process and can influence what type of loan you qualify for and how much you will have to pay for that loan.  Improving your credit score is key to getting the best deal that you can possibly get

• Introduction
• Should I Try To Improve My Credit Score
• How Do I Improve My Credit Score
• Utilization
• Timely Payments
• Positive Credit Factors
• Removing Negative Credit Factors
• Conclusion

 

Introduction

In a prior blog post we explained the 4 C’s that enable you to qualify for a home loan, Cash, Credit, Collateral and Capacity.  The last 2 weeks we took a look at how much money is needed, first for a down payment,  and second for closing costs.  If you’ve followed the series so far you understand that every person is different and needs a professional that will listen to them and help them get the deal that fits their needs best.  Now is the time to do a deep dive on credit and answer the question: How do I improve my credit enough to buy a house?

Should I Try To Improve My Credit Score?

If you’ve been reading me so far you will probably not be surprised to hear me say- as I do with nearly everything on here, that depends.  I want you to understand, realize and appreciate that literally every single deal is different and everyone’s needs are unique and special to them.  For some, a 500 credit score might be enough to accomplish the goal that they need to accomplish.  For others, it might actually make sense to gain 1 measly point to move from a 759 to a 760 credit score, as odd or pointless as that may sound.  With that caveat, we do have some general principals that guide us in structuring deals:

• 500- Absolute minimum to get somebody a loan. I’ve done 2 loans at this score. Both made sense. It’s not the norm
• 550- Lowest VA or FHA loan I’ve ever done.  Manual underwrite only.  Expensive and tedious process
• 580- Lowest level to have a chance at automated approval, lowest level to make minimum down payments on government loans
•  620- The point where I generally expect to get automated approval on FHA and VA loans. First major price break. Conventional is now possible
• 640-  Massive price break on FHA, VA, & USDA loans.  Pretty close to best pricing
• 680- Essentially this is the point after which pricing doesn’t get any better on government loans
• 700- Spot where, generally speaking, I’m usually ready to move someone from a government loan to a conventional loan (pricing and deal specific
• 740- Point after which your interest rate pricing isn’t getting any better.
• 760- Point after which your Mortgage Insurance pricing isn’t getting any better

So, with that information in mind, when I talk to my borrowers we weight 3 factors in deciding whether to try to improve their credit score:

1. How long will it take to improve your credit score
2. How much money, time and effort will it take to improve your credit score
3. How much benefit comes from improving my credit score in my particular case.

This varies from buyer to buyer, but if your loan officer isn’t talking to you in these terms, you have the wrong loan officer.  Call me at 832-557-1095 and I’d love to help you figure out if it makes sense to improve your credit score, and if the answer is yes, how to best go about doing that.

How do I improve my credit score?

Again, this is very dependent on the person.  I’ve had clients that I work with literally write a check for $128.00 to their credit card and gain 90 points and go from unable to qualify for a loan to fully qualified in the space of a week.  I’ve had other clients where we’ve slogged away for literally 19 months and counting and it feels like a journey from Greek Mythology, like Sisyphus rolling the boulder up a hill or trying to cross the Styx without payment for Charon. 

Of Course, when I say Styx some people think of Achilles being dipped in the water to gain immortality, while other people think of the ass kicking rock band from the 70’s and 80’s.  If you think of the latter, I will pause right now while you watch them play Renegade, their crowd pleasing concert finale

 

Whichever side of the debate you come down on there are 4 ways we typically suggest a consumer work at to improve their credit score:

1.  Utilization
2.  Timely payments
3.  Adding positive credit
4.  Removing negative credit

 

Utilization:

The easiest and quickest way for many people to improve their credit score many times deals with re-arranging their debt load on their credit cards.  We have some really cool tools that can simulate what a different level of debt load on a credit card (or credit cards) might do to your credit score. I’ve dealt with people who could get huge score improvements merely by making minor payments on one or two cards to have a lower utilization of debt.  Others have to push much, much harder to pay off more debt for small but important improvements to their credit scores that can move them into a more advantageous product or an interest rate that makes more sense for them.  The work that we do here can mean the difference between qualifying for a loan or not qualifying for a loan, or improving deal terms that can save them hundreds of dollars a month and tens of thousands of dollars over the life of the loan.

 

 

Timeliness of payment

I think we’ve all heard the saying, time heals all wounds.  The more recently a late payment has been made the greater the effect on your credit score. If you make a late payment last month you will probably see your credit drop like a rock, sometimes as many as 60 or 80 points!  It’s a major trauma in your financial life, and sometimes the best thing we can say is “lets give it some time”.  When we are looking for timely payments the plan often times is, lets get current on all our bills and not make any more late payments.

What happens with your credit is affected by time from the day of the misstep. Every month that you make on time payments you get credit and points added to what you are trying to accomplish. You are, in essence, telling the computers that figure your score- yes- that was a past version of me that experienced that situation. The present version of me, however, is paying my debts and is a good credit risk.  The longer you do this the more your score improves.  Typically, when we see no late payments for a 12 month stretch we are at the place where we can almost always get a loan for our borrowers.  That doesn’t mean you have to have pristine credit for 12 months to get a loan- many people get loans with recent late payments on their credit report, it merely means that if you’ve done this your odds of getting approved (all other parts of your loan being solid) go way up.

Positive credit factors

Many people just don’t have anything positive on their credit reports helping them out.  You can avoid pitfalls with your credit as you attempt to establish timely payments, but if you don’t have good, positive credit in your favor your score just won’t improve.

Many times we counsel people with credit challenges to get a small, revolving debt credit card and see that responsible usage improves their scores dramatically.  If you have no credit card, and a score too low to qualify for a mortgage we often times recommend a secure credit card for our borrowers and see their score improve dramatically, often overnight.  Now, again I need to stress, not every deal is the same. Sometimes opening up a credit card can be bad for your financial health. I’m not a debt peddler. I have a deep loathing for being in debt. I’m also not one to not explore every tool available to me to get a job done.  Be careful and wary.  This is not a magic bullet.  It’s not for everyone. But, it might help you buy the house of your dreams.

Removing Negative Credit Factors

I have one agent who is totally and completely awesome with working with people to try to take care of their credit report on their own.  I think I’m going to have to have her on here to do a podcast (when I can figure out podcasting- so call it next month maybe).  Everything a credit repair company can do for you can be done, for free, by yourself.  That’s a much longer blog.

If you don’t want to make this a second job we can help put you with a credit repair company.  A few things to note:

1. The consultation should be free
2. I wouldn’t suggest paying more than $50-$75 a month
3. I wouldn’t plan on doing this for more than about 6 months.

Whatever they can get removed (or whatever you can get removed by yourself), will improve your credit score.

Also- you can pay collections. Doing that, perversely, can drop your credit score in the immediate aftermath, but if your time frame is longer than 6-12 months this can be a good thing.  Stay tuned for a later blog to explain how this should work.

Conclusion

Credit scores are hugely important in determining if, when, and what type of deal you can qualify for.  Depending upon your individual situation it might make sense not to worry about your credit score and take the deal available for you today, or it might make sense to polish and shine your credit profile to qualify or better the current deal you would qualify for.

If you want to be ready to buy a house you need to know your credit and the affect that will have on you.  It’s very individualized and you need to have a written game plan formulated for you with a mortgage professional.  I would love to be that professional that helps you through this journey.   Call me at 832-557-1095 or email me at gabekmg@gmail.com

Until next week, when we start a discussion on collateral. Or maybe capacity.  Please feel free to share this with anyone you know thinking about being a home owner some day.

Gabe